Monday, April 04, 2016

Leif M. Hagen

Taken last week at the Stock Exchange in New York during Leif's financial business meeting in Manhattan.

The Markets

It’s
like déjà vu all over again!

This
wasn’t the first quarter, or even the first year, that bond markets have not
performed in the way Wall Street strategists have expected.

During
2014, bond yields were expected to rise. They did not.

During
2015, bonds were predicted to finish the year yielding about 2.8 percent to 3.3
percent. On December 31, they were at about 2.3 percent.

During
the first quarter of 2016, despite persistent predictions yields would move
higher after the Federal Reserve’s rate hike, yields fell and bond values
increased. Government bonds delivered the strongest returns gaining 3.7 percent
for the quarter, according to Bloomberg.

There
is an inverse relationship between interest rates and bond prices. When rates
move higher, bond prices move lower, and the value of investors’ holdings may
fall. When rates move lower, bond prices move higher, and the value of
investors’ holdings may increase.

The
current bull market in bonds started in 1982. During January of that year, the
10-year U.S. Treasury yield was about 14.6 percent. Since then, rates on
Treasuries have declined and investors have reaped the rewards of steadily
rising bond values.

The
Federal Reserve began tightening monetary policy in December 2015 by raising
the fed funds rate. Late in the month, the rate on benchmark 10-year Treasury
bonds reached about 2.3 percent. However, after central banks in Europe and
Japan loosened their monetary policies, yields on Treasuries moved lower. By
the end of the first quarter of 2016, they were at about 1.8 percent.

Overseas,
the picture was a bit more complicated. An expert cited by Bloomberg explained, “Of the five countries that performed best – Germany, Belgium,
Denmark, Japan, and the United Kingdom – the two-year debt of all but the
United Kingdom has negative yields.”

When
bonds have negative yields, investors are paying to lend their money. Why would
anyone do that? The Economist reported
there are three types of investors who buy bonds when yields are negative: 1) central
banks and other entities that must own government bonds, 2) investors who
expect to make money when a country’s currency gains value, and 3) investors
who would rather suffer a small loss in government bonds than risk a bigger
loss investing in something else.

That
something else might have been a stock market during the first month or so of
the quarter.

Globally,
stocks underperformed bonds, returning 0.4 percent for the first quarter of
2016. However, the end-of-quarter return doesn’t really tell the whole story.
Fears of global recession, among other things, produced a wild ride for stock
market investors during the first months of the year. Worldwide, stocks were
down about 11.3 percent through mid-February, according to Barron’s, and then gained 13.2 percent to end the quarter slightly
higher, overall.

The
United States delivered strong returns for the period. Barron’s reported:

“Still,
the United States fared a good deal better than other developed markets, with
Europe down 2.4 percent, the United Kingdom off 2.3 percent, and Japan worse by
6.4 percent – a surprise because overseas markets were touted as the places to
be. That is, except for emerging markets; but their results also confounded the
seers, as they returned a robust 5.8 percent for the quarter.”

At
the end of last week, the Bureau of Labor
Statistics’ monthly jobs report showed more people were looking for jobs,
increases in employment exceeded analysts’ expectations, and average hourly
earnings had moved higher. These were positive signs for the U.S. economy.

Data as of 4/1/16

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor's 500 (Domestic Stocks)

1.8%

1.4%

0.6%

9.9%

9.2%

4.8%

Dow Jones Global ex-U.S.

0.3

-2.8

-12.5

-1.8

-2.2

-0.6

10-year Treasury Note (Yield Only)

1.8

NA

1.9

1.8

3.5

4.9

Gold (per ounce)

-0.6

14.3

1.4

-8.5

-3.1

7.5

Bloomberg Commodity Index

-1.7

-0.8

-22.0

-17.0

-14.4

-7.3

DJ Equity All REIT Total
Return Index

3.3

6.1

5.0

9.9

11.5

6.7

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg
Commodity Index returns exclude reinvested dividends (gold does not pay a
dividend) and the three-, five-, and 10-year returns are annualized; the DJ
Equity All REIT Total Return Index does include reinvested dividends and the
three-, five-, and 10-year returns are annualized; and the 10-year Treasury
Note is simply the yield at the close of the day on each of the historical time
periods.

Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not
applicable.

how do investors
feel about stock markets? The
American Association of Individual Investors (AAII) surveys investors weekly
about whether they are bullish, bearish, or neutral on stock markets for the
next six months. Last week, the majority of participants indicated they were
neutral. There was less bullish sentiment than the previous week, but bulls maintained
a slight edge over bears:

·Bullish: 27.2
percent

·Neutral: 47.1
percent

·Bearish: 25.8
percent

The AAII also asked whether participants were better
off, worse off, or as well off as they had been eight years ago (early in the
Great Recession). More than one-half (54 percent) said they were better off.
The remainder was almost evenly split. Twenty-four percent indicated they were
not better off, and 23 percent said they were as well off.

Weekly
Focus – Think About It

"It was the best of times, it was the worst of
times, it was the age of wisdom, it was the age of foolishness, it was the
epoch of belief, it was the epoch of incredulity, it was the season of Light,
it was the season of Darkness, it was the spring of hope, it was the winter of
despair, we had everything before us, we had nothing before us, we were all
going direct to Heaven, we were all going direct the other way…”

expenses, or sales charges.
Index performance is not indicative of the performance of any investment.

* The 10-year Treasury Note
represents debt owed by the United States Treasury to the public. Since the
U.S.

Government is seen as a
risk-free borrower, investors use the 10-year Treasury Note as a benchmark for
the long-term bond market.

* Gold represents the
afternoon gold price as reported by the London Bullion Market Association.

The gold price is set twice
daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in
U.S. dollars per fine troy ounce.

* The Bloomberg Commodity
Index is designed to be a highly liquid and diversified benchmark for the
commodity futures market. The Index is composed of futures contracts on 19
physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT
Total Return Index measures the total return performance of the equity
subcategory of the Real Estate Investment Trust (REIT) industry as calculated
by Dow Jones.

* Yahoo! Finance is the
source for any reference to the performance of an index between two specific
periods.

* Opinions expressed are
subject to change without notice and are not intended as investment advice or
to predict future performance.

* Economic forecasts set
forth may not develop as predicted and there can be no guarantee that
strategies promoted will be successful.

* Consult your financial
professional before making any investment decision.

* Stock investing involves
risk including loss of principal.

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